The private equity community is split over how much transparency is appropriate, as the industry faces up to more public scrutiny.

As buyout firms continue to increase their influence within capital markets and set their sights on more ambitious bid targets, they are attracting more attention. At last month’s Financial News Awards for Excellence in Investment Banking, Charles Sherwood, a partner at UK firm Permira, became the latest to argue for greater openness.
Sherwood said: “It is important the industry is able to get the positive message across, in particular that we can explain what drives the value growth in private equity. Its justification is not simply self-evident. Its case has to be made. The argument we succeed because we do things that other people don’t find out about is hardly likely to engender trust.”
Rod Selkirk, chairman of the BVCA, the UK venture capital industry trade body, and head of Hermes Private Equity, said at last week’s all-party group on private equity: “We must address concerns about transparency and how our business is conducted.”
But others believe buyout firms are already transparent – to the people who matter. Although many of the firms contacted by Financial News were unwilling to comment publicly, all said investors in their funds enjoy unparalleled transparency.
Simon Witney, a partner at law firm SJ Berwin, said: “As far as the relationship between fund manager and investor is concerned, there is no asset class more transparent than private equity.”
Investors in public markets had far less transparency, he added.
Patrick Dunne, a director at buyout firm 3i, said: “As private equity becomes a more significant industry, there’s an expectation that it should be more open and transparent.
“But the question is, transparent to whom? We’re already transparent to those who invest in our business. And as a plc to a much broader audience as well.” 3i was recently judged to have the best investor relations website of any UK company.
But how could the industry become more open? Financial News examines four areas where private equity might benefit from greater transparency.

Fundraising: This has always been secretive, thanks largely to regulatory pressures. Publishing detailed information about who invests in a buyout fund and how their allocations are calculated might make observers more comfortable about where these pools of capital are coming from.
But critics say it would not benefit potential investors who receive large amounts of information about a new fund – in some cases, more than they can digest, according to one placement agent.
Equally, any such attempts would be hampered by the restrictions imposed on firms by the US Securities and Exchange Commission. To qualify for the “private placement” exemption from SEC registration, a fund must avoid any form of “general solicitation or general advertising” – which means keeping the process private.
Permira has blazed a trail for greater transparency by insisting on the right to name every investor in its fund. But not everyone is convinced it will be the first of many. “If you’re a private individual investing in a fund, why should you have to tell people where you’re putting your money?” said one buyout source. Another added: “It will be a matter for individual funds to decide, in conjunction with their individual investors.”

Deals: When a buyout is announced, details such as growth plans, management incentive deals and financing structures remain secret, even after the deal is completed. Greater transparency about these details might help reassure people of a firm’s intentions for its new business.
An industry figure said: “There’s a commercial imperative for transparency. It’s in the firm’s interest to retain public confidence, to ensure people have a positive view of you.”
But one source at a large US buyout house said the company’s employees were most in need of a transparent approach. He said: “We send out a memo to every employee on the day we buy the company, explaining who we are and what we plan to do with the business.” This is critical to the strategy, yet many firms don’t bother, he said.

Portfolio companies: Buyout firms have always been reticent about the performance of their portfolio companies.
Dunne believes confidentiality is sometimes important. He said: “There’s a sensible balance to be found. We’re transparent about 3i but we also protect the commercial interests of our portfolio companies.”
There is a realisation that firms need to balance this with the need to explain how they are able to generate such big returns on sales.
One source at a UK buyout firm said: “We need to do a better job of explaining the kind of value that private equity ownership can bring to a company.”
Sherwood insisted Permira was trying to change. He said: “We have worked hard in this area and we are encouraging chief executives and chairmen to be as open as possible.”

Performance data: Some critics say performance statistics should be available for all funds, so investors can assess their merits.
But there are dangers. Performance figures on many funds are available through the websites of several US fund managers. In 2004, Calpers, the $220bn (€167bn) California state pension fund, agreed to disclose the details of its private equity investments, and other large North American funds followed. UK public entities could soon be forced to do the same – the courts recently ruled Wolverhampton City Council’s pension fund was bound under the Freedom of Information Act to disclose full details of its private equity commitments. However, many in the industry dispute the value of these statistics.
One source at a large buyout firm said: “A private equity fund needs to be judged over its 10-year life cycle. It is meaningless to look at the internal rate of return of a new fund that has not started making divestments.”
Firms operating in different segments of the market might also have different return expectations. “You end up comparing apples with oranges,” said another.
The other problem is that greater transparency could make it harder for public entities to gain access to top performing funds. In the US, several buyout firms, including Sequoia Capital, stopped accepting investment from any fund that disclosed its figures.
In the UK, where the pension funds are smaller and less influential, there is more chance that public entities may be frozen out.